This slide is about environmental scanning it also talk about strategic management; thus teaching us ways of managing businesses very well.

1. LEVEL 400
STRATEGIC MANAGEMENT
BUMG 452
Lecture 3
THE EXTERNAL ENVIRONMENTAL
SCANNING: Remote, Industry &
Task Environment Analysis
Lecturer: Dr E. Nifah

2. Learning Objectives
1. Explain the relationship between the external
environment and strategic drift.
2. Explain strategic intent and strategic fit
3. Explain some of the specific tools that can be used to
audit/evaluate/scan the external environment of a
firm.
4. As a Strategist, explain the importance of external
environmental analysis to a start-up business.
5. Prepare EFAS, after evaluating the key external
factors.
6. Explain the elements of Porter’s five forces and
comment on its significance.
1-2
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3. STRATEGIC DRIFT and THE EXTERNAL ENVIRONMENT
• Most businesses do not change in line with the environment (it
is not always easy to change).
• With Time, Change is a must.
• Strategic drift happens when the strategies of an established
business is no longer relevant or do not match the external
environment that it faces or operates in.
• Strategic drift usually arises from a combination of factors,
which include when:
– A business fails to adapt to a changing external environment
(for example, the fast-paced social and technological changes).
– A discovery that what worked before (in terms of
competitiveness) does not work anymore.
– Complacency sets in, often due to previous success which
management assume will continue.
– Senior management think there is no problem, even when they
are faced with the evidence.
1–3

4. Four Phases of Strategic Drift
1.Incremental change: A series of small, incremental changes to strategy,
enable the business to remain in touch with little significant changes in the
external environment.
2. Strategic drift: The rate of change in the external environment is
accelerating and that incremental changes in strategies by the business are
not enough. The business begins lose its competitive advantage.
3. Flux: There is now a significant gap between what the market expects and
what a business is delivering. Management may recognize this gap and alter
strategies but may be indecisive or too late.
4. Transformational change or death: Either management recognize the
need for a transformational change in strategic direction, or the business fails.
It often takes new leadership to recognize this and make business relevant,
else death.
• Kodak – Failed to respond to rapid development and take-up of digital
photography, (had close to a decade to adapt their business to the true
demand of their customer: easily accessible photos without the hassle of
purchasing film). Note: Kodak created film photography technology.
• Nokia – Lost dominant global market leadership in mobile phones to Apple and
Samsung, by failing to respond to smart phone technology.
1–4

5. STRATEGIC DRIFT
4-5

6. EXTERNAL ENVIRONMENTAL SCANNING
• Analysing the external, is critical for the development
of current strategies; as well as forming the basis for
measuring performance, and taking corrective
actions, if there are deviations.
• Environmental analysis or scanning involves the use of tools or
techniques including:
a. STEEP or PESTLE (external tool)
b. TOWS (external & internal tool)
c. Porter’s Five Forces (external tool)
d. External Factor Evaluation (EFE) Matrix
(Competitive/Industry analysis) (external tool)
e. Strategic Position & Action Evaluation (SPACE)- lecture
4/5 - (external & internal tool)
f. Competitor Profile Matrix (CPM)- lecture 4/5 - (external &
internal tool) 1–6

7. 7
The Relationship between The Firm
(Internal environment) and The External
Environment
1. THE FIRM
(micro
environment)
Core Competence,
Synergy, Value
Creation
2a. Operating or task or Market Environment
(Global and Domestic)
•Competitors •Labour
•Suppliers
•Customers
2b. Industry Environment (Global and Domestic)
•Entry barriers
•Supplier power
•Buyer power
•Substitute availability
•Competitive
rivalry
•Creditors
2c. Remote (General) Macro Environment (Global and Domestic)
•Political, Economic, Social-cultural, Technological, legal, Ecological

8. Cont.
Identifying External Environmental Variables
Operating, Task or Market environment refers to
groups that directly affect a company and are affected
by the company are:
• Government
• Local communities
• Suppliers
• Competitors (operate in an industry or sector)
• Customers
• Creditors
• Unions
• Special interest groups/trade associations
• Labour
4-8

9. Competitors and Industry
• Industry analysis- an in-depth examination
of key factors within the environment in
which it operates.
• An industry refers to a group of firms that
are related in terms of their primary
business activities.
• Competitors refer to firms that offer same,
similar, or substitute products or services to
same or similar customers in the business
areas in which they operate.
4-9

10. A. STEEP or PESTLE Analysis
STEEP or PESTLE is used to analyze the
Remote or General or Macro environment.
– Political-legal forces
– Economic
– Ecological
– Technological
– Socio-cultural
4-10

11. Trends in Political-Legal Forces
For instance:
– Enforcement of competition laws
– Taxation
– Labour laws
– Government policies
– World Trade Organization
4-11

12. Trends in Economic Forces
For instance:
• Interest rates
• Inflation
• Exchange rates
• Oil prices
• Food prices
• Energy prices
• Emerging markets
• BRICS countries
• Eastern Europe
• ECOWAS 4-12

13. Trends in Socio-cultural Forces
– Expanding seniors market: Silent Gen. (1992-45) and
baby boomers (1946-1964)
– Impact of Gen X (1965-1977)
– Impact of Gen Y (Millennials: 1978-1996)
– Impact of Gen Z (Zoomers: 1997-2012)
– Demographics
– Increasing environmental awareness
– Growing health consciousness
– Declining mass market
– Changing pace and location of life
– Changing household composition
– Increasing diversity of workforce and markets
4-13

14. Analysis of Societal Environment
4-14

15. 4-15

16. Trends in Technological Forces
– Portable information devices and
electronic networking i.e., smart
phones
– Alternative energy sources
– Precision farming
– Artificial intelligence
– Genetically altered organisms
– Smart (mobile) robots
4-16

17. Trends in Ecological forces
Natural Environment:
• Pollution - Air, water, and land
• Wildlife - Loss of habitat and
biodiversity
• Climate – Global warming
4-17

18. B. TOWS (Situation) Analysis; External i.e., TO)
• TOWS is an analysis tool that is used to evaluate the Threats,
Opportunities and Strengths, Weaknesses of a business external
environment.
• TOWS is an important tool in order to formulate strategy and is based on
the assumption that an effective strategy is derived from a sound “fit”
between a firm’s internal resources and its external situation.
– TOWS is defined precisely as:
 Threats: Characteristics or forces or conditions within the external environment
that may prevent the organization from achieving its strategic goals. They are
major unfavourable situations in a firm’s external environment.
 Opportunities: Characteristics or forces or conditions in the external
environment that have the potential to help the organization achieve or exceed
its strategic goals. They are major favourable situations in a firm’s environment.
 Weaknesses: Internal characteristics or forces or conditions that might inhibit
or restrict the organization’s performance. They are limitations or deficiencies in
one or more resources or competencies relative to competitors.
 Strengths: Positive internal characteristics or capabilities that the organization have
and can exploit to achieve its strategic goals. They are resource advantage relative to
competitors and help to satisfy the needs of the markets a firm serves.

19. Cont.
• TOWS can be used to analyse the Competitive/Industry
environment.
• Competitive analysis involve analysing competitors in the
sector and industry in which a firm operates.
• Collecting and evaluating information on competitors
is essential for successful strategy formulation.
– Identifying major competitors is not always easy
because many firms have divisions that compete in
different industries or sectors.
• i.e., privately held firms do not publish any financial
or marketing information.
– Most multidivisional firms generally do not provide
sales and profit information on a divisional basis
for competitive reasons.
1–19

20. TOWS Analysis Diagram for External & Internal
Analysis)
20
Numerous environmental
opportunities i.e.
Possible new markets. Strong economy, weak
market rivals, skilled labour force
Major environmental threats
i.e.
New and strong competitors, shortage of resources,
changing market tastes, new regulations, substitute
Critical internal
weaknesses
i.e.
Outdated facilities,
Inadequate R & D,
Weak management,
obsolete
technologies
Substantial
internal
strengths
i.e.
Manufacturing
efficiency, skilled
workforce, good
market share, strong
financing, superior
reputation
Cell 3 (WO): Supports
a turnaround-
oriented strategy
Cell 4 (WT):
Supports a defensive
strategy
Cell 1 (SO): Supports
an aggressive
strategy i.e. attempt
to maximize returns
by taking relatively
high risk
Cell 2 (ST):
Supports a
diversification
strategy

21. C. Porter’s 5 forces
Porter’s 5 forces is used to analyze the industry
environment.
Industry- a group of firms that produces a
similar product or service.
 Porter’s 5 forces consist of the following:
– Threat of new entrants
– Rivalry among existing firms
– Threat of substitute products
– Bargaining power of buyers
– Bargaining power of suppliers
– Relative power of other stakeholders (added)
4-21

22. Cont.
4-22

23. Cont.
1. Rivalry Among Existing Firms in industry
• It refers to competition for the same objective or for
superiority or advantage in the same industry.
• The intensity of rivalry depends on the following:
• Number of competitors
• Rate of industry growth
• Product or service characteristics
• Amount of fixed costs
• Capacity utilization
• Height of exit barriers
• Diversity of rivals
• Price competition
4-23

24. Cont.
2. Threat of new entrants- new entrants
to an industry bring new capacity, a
desire to gain market share and
substantial resources.
–Seriousness or the extent of threat
of entry depends on:
•Reaction of existing firms.
•Barriers to entry.
4-24

25. Cont.
 Threat of new entrants depend on entry
barrier, whether the barrier is high or low.
 Entry barrier is an obstruction that makes it difficult for
a company to enter an industry and may be any or a
combination of the following:
• Economies of scale
• Degree of product
differentiation
• Capital requirements
• Switching costs
• Brand loyalty
4-25
•Access to distribution
channels
•Cost disadvantages due to
size
•Government policies

26. Cont.
3. Threat of Substitute Products or
Services- products that appear different
but can satisfy the same need as another
product.
As all firms want to compete in terms of
quality, substitute will last for longer in
the market if the quality of the substitute
is higher than the existing alternate
product.
4-26

27. Cont.
4. Bargaining Power of Buyers- ability of buyers to force
prices down, bargain for higher quality, play
competitors against each other.
• The extent of the power of buyer is dependent on
the following:
– Large purchases by buyer(s)
– Backward integration
– Alternative suppliers
– Low cost to change suppliers
– Product represents a high percentage of buyer’s cost
– Buyer earns low profits
– Product is unimportant to buyer
– Buyers are few
4-27

28. Cont.
5. Bargaining Power of Suppliers- ability of
suppliers to raise prices or reduce quality.
This relative power depends on:
– Industry is dominated by a few suppliers
– Supply supplies differentiated or unique product or service
– Substitutes are not readily available
– Ability for supplier to forward integrate
– Unimportance of product or service to the industry
– Firms’ that purchase from these suppliers are many i.e.,
the demand for products will be high and supplier power
will be high.
– Suppliers have built up switching costs. (Switching cost is
the negative cost that a consumer incurs as a result of
changing suppliers, brands or products).
4-28

29. Cont.
6. Relative Power of Other Stakeholders
• Government
• Local communities
• Creditors
• Trade associations
• Special interest groups
• Unions
• Shareholders
• Complementors- products that work well with a firm’s
product.
4-29

30. D. EFE Matrix (Competitive/Industry
Analysis)
• The EFE (External Factor Evaluation Matrix- (also
called External Factor Analysis Summary) is a tool
that can help a firm to evaluate the market and
industry in which a business operates.
• Multinational firms, especially need a systematic
and effective external-audit system because
external forces among foreign countries vary so
greatly.
– The EFE matrix can be considered as a component of
PESTLE & TOWS analysis.
1–30

31. Example of EFEM/EFAS
External factors Weight
(Industry-
based)
Rating
(Firm-
based)
Weighted score
Opportunities
1. Few competitors 0.1 3 0.3
2. Digitalisation of the economy 0.2 3 0.6
3. Increased internet usage 0.2 4 0.8
Threat
1. High Inflation 0.2 2 0.4
2. Internet scam 0.2 3 0.6
3. Govt Tax (e-levy) on
purchases
0.1 4 0.4
TOTAL 1.0 3.1 (Total
Weighted Score)
1–31

32. Cont.
• Regardless of the number of key opportunities and
threats included, the highest possible total weighted-
score for an organization is 4.0 and the lowest possible
total weighted score is 1.0.
• The average total weighted score is 2.5 and it indicates an
average response by the firm in question.
• A total weighted score of 4.0 indicates that an organization is
responding in an outstanding way, with superior response to
existing opportunities and threats in its industry.
– In other words, the firm's strategies effectively take advantage
of existing opportunities and minimize the potential adverse
effect of external threats.
• A total weight score of 1.0 indicates that the firm's strategies
are not capitalizing on opportunities or avoiding external
threats, with poor response.
1–32

33. E. Four Corner’s Analysis
33
• Developed by Michael Porter, the four corner’s analysis is a
useful tool for analysing competitors.
• It emphasises that the objective of competitive analysis should
always be on generating insights into the future.
• The four corner’s model can be used to:
•develop a profile of the likely strategy changes a competitor
might make and how successful they may be.
•determine a competitor’s probable response to the
range of feasible strategic moves other competitors
might make
•determine a competitor’s probable reaction to the range of
industry shifts and environmental changes that may occur.
• The ‘four corners’ refers to four diagnostic components that
are essential to Competitor analysis:
• Future goals (Motivation)
• Current strategy
• Management assumptions
• Capabilities (Resources)

34. 4-34